To Inc. or not to Inc.??

Question

Hey BP fam!

I am putting together my business plan and trying to determine how I am going to hold my properties.

Is it better to have them tied to a Trust, LLC, or Inc. ? I was going through the forum this morning as I was awaking up and saw that it is not wise to have your properties owned by a company. I can only assume the benefit to this would be for personal taxes. Is it the same for a W2 Employee? Or is this just one opinion and the fact is most people prefer to hold properties in corporations. My feeling is that one day I may not want people to have easy access to who I am. An example would be if I purchase a foreclosed home or one at an auction.

This also leads to my next question. If I do decide to form a business how do I stay somewhat anonymous?

Ned Carey · Answer

@David Dachtera but it is quite likely that whoever signs the documents is an owner of the company that owns the property. My point is there are way to find out who owns a company. It isn't always easy and may require a lawsuit and discovery. Of course I think the original poster just wanted to be able to avoid someone easily finding him.

As an aside when it comes to lead paint lawsuits in Baltimore city, if you sign documents you are legally considered the owner despite any entity which may be the true owner. The highest court in MD, the Court of Special Appeals, found that to be the case. Not right, but sadly it is the law in MD.

David Dachtera · Answer

@Ned Carey,

...and when the only "discoverable" information about an LLC, for example, is that it is owned by an S-Corp and a trust, then what?

...oh, yeah - and the S-Corp is owned by the LLC and the trust.

...and you can find out who is the trustee of the trust, but not the beneficiary.

So, in MD, the CEO (an employee) who signs papers is the actual owner? How does the company recoup its investment? ...or is it charged to the CEO as a taxable event?

See, this wasn't devised by some rube, Ned. Some fairly high-powered law firms have invested many hundreds of thousands - if not millions - of dollars and many tens - if not hundreds - of thousands of man-hours developing the structures they suggest.

True, it's not the same in every state, and nothing is ever 100%. Still, better to have the best protection available "when the predators encircle" than to hope that your umbrella policy will protect your possessions instead of adding to the blood the predators seek: "Sure! We'll take the payout - AND your stuff!!!"

Remember: if your umbrella policy has to pay out, it means litigation against you succeeded  - you lost! Better to discourage litigation from the start. If you have nothing to take, why would an attorney accept the case of someone who wants to sue?

No court in any state can divest you of anything you do not own. Eminent domain may be one exception, though.

I can put you in touch with my group's tax and legal experts if you think you have a valid challenge, of course.

David J Dachtera

"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."- DJ Benedict

Ned Carey · Answer

Perhaps @Brandon Hall or @Steven Hamilton II will chime in.

First whoever said you should not own properties in a "Company" did not know what he or she was talking about. Or at east certainly did not give you enough detail to be useful.  You essentially have a "company" by virtue of the fact you are doing business as a sole proprietor.

Holding real estate in a C-corp (the traditional corporation) is the worst way to hold property. I will leave it to others to explain why. A c-corp might be beneficial when you get VERY large and have multiple companies. But it would not be used for holding properties.

An S-corp may save you some self employment tax for active investing but not passive investing like buy and hold.

As @David Dachtera says conventional wisdom says an LLC is the best entity to hold property in. That is IF you chose to create an entity. There are advantages and disadvantages to an LLC vs holding in your own name. It is harder to finance properties held by an LLC. An LLC does not offer as much liability protection as many think and it certainly is not a substitute for insurance.

I am  not excited about trusts. This is a very complicated area of the law and there are many kinds of trusts.

Forget the anonymous part. All someone has to do is look in the land records and see who signed deeds, mortgages and such. One way or another you are going to be doing business with people and they are going to know who you are. Do you think Apple would be as successful if no one knew who Steve Jobs was?

The above are generalities and not intended to be legal advice. The business structure you use is a complex question that takes into account both legal/liability issues as well as tax issues. Get good advice from an attorney and CPA.familiar with real estate. Keep in mind that they may recommend contradictory things. You are often weighing costs vs risk and the answer is not always clear cut.

David Dachtera · Answer

@Jocelyn Evans,

Conventional wisdom has it that long-term holds should be in LLCs, short term and other income producing deals in an S- or a C-Corp, and that your first line of defense - a personal trust - should be part owner of both.

Yes - consult a business / estate planning attorney on what works best in your location. I can refer you to my group's tax ad legal experts, if you need a referral.

David J Dachtera

"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."- DJ Benedict

Steven Hamilton II · Answer

What is your specific business plan what type of investing are you doing? If you are holding rentals DO NOT DO THAT. You will want to use LLCS and none of them should be taxed as a corp. You can use a parent LLC that is disregarded. You need to spend some time talking with someone who specializes. I'm happy to explain some of this in further detail for your situation if you need.

Bony Mathew · Answer

Ned, thank you for that excellent explanation! I think i see where your going with that discussion. One questions howewer I have is how about having a S-corp(inc) structure as your management company for these properties you would buy under different LLC's, would that work?

See the image below:

or does ABC Inc. should be an ABC LLC instead ?!

Jocelyn Evans · Answer

@Ned Carey, @David Dachtera and @Steven Hamilton II

Thank you all so much! This is exactly what I needed!

Originally I was interested in staying anonymous for the sake of the public or people that may be disgruntled (if that's even possible). However, like I had mentioned to @Al Wilson, one great thing about this forum is that you learn so much and while you may still have to hire people to help you get started my list of questions has expanded and a couple of questions have actually been crossed off. :)

Thank you all for your input and expertise!!!!

Please feel free to PM me if you have any referrals that pertain to this.  In case you are not aware I am located in Texas.

Thanks all!

David Dachtera · Answer

@Ned Carey,

Just because I signed the documents does not mean I own the property.

Litigants in lawsuits can't take from me that which I don't own.

"Control everything, own nothing."

David J Dachtera

"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."- DJ Benedict

Steven Hamilton II · Answer

NEVER hold long term real estate in an entity taxed as a corporation S or C corp unless you're a Non resident alien of the US.Typically we say LLC or LLC taxed as a partnership for rentals.  It is clean and organized.

Corps can be used for flipping; however, so can partnerships.

Jocelyn Evans · Answer

@David Dachtera Thank you! I would really appreciate that!

To Inc. or not to Inc.??

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